Global Rate Cuts Fail to Contain Crisis

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Recession Predicted For U.S.

A major slowdown is predicted for the world's economy and an outright recession in the United States, according to a report by the International Monetary Fund. Anthony Mason reports.

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The IMF said yesterday that the financial crisis would cause the world's industrialized countries next year to experience their weakest year of growth since 1982. It predicted a recession in the United States, with unemployment averaging 6.9 percent in 2009. The rate hasn't been that high since 1993 and is currently 6.1 percent.

IMF and many private economists now expect the U.S. slowdown to last years rather than months. "It will take considerable time before losses are fully recognized, banks are recapitalized, leverage is reduced and market confidence is regained," the IMF said in its report.

The combined rate cuts, which could be followed by more of the same in some of the countries involved, would help limit that damage by making it cheaper for consumers and businesses to borrow money. However, the cuts may have less impact than they normally would because of the deep credit crisis, as many banks are disinclined to lend to customers at any price.

Olivier Blanchard, chief economist of the IMF, said in a news conference that the interest rate cuts were a "step in the right direction" but that more may be needed.

The Fed lowered the federal funds rate at which banks lend to each other to 1.5 from 2 percent. It had been cutting the rate drastically in a campaign that ended in the spring, then held it, indicating it was more worried about inflation. But the profound financial crisis and a slew of weak economic data from even before the credit markets froze convinced Fed leaders that they needed to take action to stimulate the economy and that the risk of high inflation had receded.

"Incoming economic data suggest that the pace of economic activity has slowed markedly in recent months," the policymaking Federal Open Market Committee said in a statement.

The Fed gave no strong indication of whether it would cut the rate again at its regularly scheduled meeting Oct. 28 to 29. Policymakers will make that judgment based on how credit markets fare between now and then and on the latest economic data.

Yesterday's action was engineered primarily by Fed Chairman Ben S. Bernanke, Bank of England Governor Mervyn King and European Central Bank President Jean-Claude Trichet in a series of phone calls over the weekend. The three central bankers have collaborated for years; King and Bernanke in particular come from the same insular world of academic monetary economists.

The European Central Bank has traditionally emphasized its concerns about inflation over concerns about slow growth. Additionally, Trichet has been trying to signal to powerful German and French unions that inflation will remain low so they do not need to demand big raises in their contracts. For that reason, the bank raised rates as recently as this summer. Since then, Trichet had shown no inclination to cut.

Things changed by this weekend, in part because finance ministers in Europe had little luck finding common solutions to the financial crisis.

"The situation in Europe was nothing short of chaotic last week," said Marvin Goodfriend, an economist at Carnegie Mellon University who was in Europe at the time. "It was clear that we needed a comprehensive approach to the crisis that extended overseas."

Bernanke, Trichet and King had largely decided by Sunday night to move ahead and talked about details Monday, reaching out to other central banks that might make the same action. Ultimately, the Swiss, Canadians and Swedes signed on, and Japan indicated its support while not acting. China acted at the same time, though it did not participate in a joint announcement.

At 6:30 a.m. Tuesday, the central bankers held a conference call to reach final agreement to move forward. But each central bank had to make a formal decision, given the unique legal structures and decision-making processes.

Members of the Fed's policymaking committee held their own conference call at 5:30 p.m. Tuesday and unanimously agreed to the move.

Some Fed policymakers had dissented from their colleagues earlier in the year, reluctant to cut rates for risk of stoking inflation. But such fears may have been assuaged in this case by the sharp decline in oil prices in recent months. Also, the fact that other central banks were cutting rates at the same time meant that the cuts would not drive a sharp decline in the dollar the way a unilateral rate cut might.

After each bank completed its decision-making process, the announcement was made at 7 a.m. yesterday.